Adrian Hamilton: This is a crisis of politics not markets

The striking thing about the euro crisis and the crash in the markets is not that they should happen. You would have needed to be living on a different planet to have been ignorant of the fact that the financial crisis wasn't over and that further disruptions were bound to occur. What is so startling is the sheer joy with which so many commentators and experts are now predicting the end of the euro and the collapse of the European dream.

Partly this is the re-emergence of the anti- European brigade, particularly from across the Atlantic. One of the features of the "Great Credit Crunch" is the way that it has provided a new reason for the repetition of long-held beliefs - that capitalism is dead, that governments must intervene, that consumerism must be replaced by a different lifestyle and so on.

In the case of the euro, one thing that has come out of the woodwork, especially from across the Atlantic, is the cry that Europe has become sclerotic, it's citizens mollycoddled from birth to the grave. The eurocrisis, in this view, is the occasion for a roll-back of the nanny state, a reduction of benefits, a lessening of pensions - in other words all the things being pressed on the so-called Pigs (Portugal, Italy, Greece and Spain) at this moment.

And then of course there are the economists, the people who brought you the mathematical models and the theories of the efficacy of markets which lay behind the crisis. Given their responsibility, or lack of it, for the crunch, you might have thought a period of silence would become them. But not a bit of it, like the bankers whose behaviour they gave cover for, they have returned more self-confident than ever, applying their own form of market absolutism to the euro's struggles.

No it won't, or rather no, it need not. The euro was born out of a political will for economic integration and it will survive through political will. Whatever the false promises made by its founders of economic benefit, whatever indeed the loss of confidence in the European public in the EU as an institution (which is real), most people within the Eurozone seem to believe that it is a comforting fact of their lives. That is even true of the potential applicants from Eastern Europe.

What we are witnessing now is the second phase of the Credit Crunch. The first was the seizing up of interbank flows. It was essentially a financial crisis demanding a financial response. The second phase is the unwinding of debt, which is as much a political issue demanding political decisions about expenditure, tax and investment.

Politicians who had, for very good reason, wanted to say that the whole crisis was down to the banks now have to face up to all the underlying problems of excessive debt, unbalanced development, the overhang of pension burdens and over-reliance on property and development. The particular pattern may vary from country to country but the overall pressure to do something about it is true for virtually all. Even the Germans have had to announce drastic expenditure cuts.

It cannot be said that European governments have risen to the challenge. Nor have things been helped by the way the markets have pushed the crisis from one of Greek debt to one of the European banks exposure to it and the other indebted nations. Hence the fears that the whole business could end in a new financial cataclysm as banks find it difficult to borrow or lend.

But at bottom even this is a political problem. The trouble with the trillion dollar rescue package put together by the Eurozone governments was that it once again bailed out the commercial banks with taxpayer's money, this time at the cost to the public of dramatic and early expenditure cuts. What governments now need to do, to reassure the markets as well as their own electorates, is to sit down with the banks and ministers and do what is being done in Dubai and what was done in the Latin American and Asian banking crises – which is to reschedule the debt along time frames more realistic to the national fiscal positions and popular acceptance. It means losses to the banks and to other lenders, but it is better than default. At the same time, there will have to be a push for greater economic supervision and tighter rules within the Eurozone.

It's not easy but none of this is beyond the wit of officials and premiers, even within the existing rules. And against the herdlike panic of the markets, and the dire predictions of the collapse of social cohesion in the affected countries, governments do have a huge strength on their side. The public wants a solution and accept, in this second phase of the Credit Crunch, that the glory days of expansion and consumption are over. Austerity is the order of the day. It's the fairness and the competence with which it is imposed that matter now.

China won't allow war in Korea

If you need proof of the irrational behaviour of markets, look at their response to the stand-off between North and South Korea. Rumour of war swept the financial centres and induced a global sell-off of stocks. Well, it's always possible there will be war. It always has been. But the simple point about North Korea and the Chinese influence over it is that the one thing Beijing will throw its weight into is preventing war.

US Secretary of State, Hillary Clinton, would like it to do more, of course, and tell Pyongyang to apologise for the submarine attack that sank a South Korean war ship and reach a deal. China won't do that, partly because it's not sure that it can force Kim Jong Il that far. But Mrs Clinton's futile efforts do raise one question. South Korea has always looked to the US for its security. But if it is only China that can stop open hostilities, should it not be turning its attention rather northwards than westward? And if that is true of South Korea, is it not also true of Taiwan?

a.hamilton@independent.co.uk

For further reading

'This Time is Different', by Carmen Reinhardt and Kenneth Rogoff (2009).